What the hell is Quantitative Easing? Never understood it properly.



What the hell is Quantitative Easing? Never understood it properly.

In: Economics

A central bank prints more money and uses it to buy bonds from banks. This increases the amount of money in circulation.

Without the technicality, QE is a method for Central Banks to quickly introduce more money into the economy. Most money is created electronically nowadays – people call it a printing press but very little of the money circulating in the economy are actual notes or coins.

More technically, a Central Bank simply creates money by adding it to the bank account of banks in exchange for assets (mostly govt bonds but in some cases mortgage backed securities, corporate bonds and even shares in some companies). Unlike normal organizations/individuals, the Central Bank doesn’t need money in their accounts to buy things, it simply creates the money by depositing the amount in the seller’s account.

Central Banks are a bank that all other private banks must open cash accounts with and that used to be pretty much it. All other banks must deposit a certain amount of money in their account at the Central Bank. Generally, Central Banks don’t buy or own assets from the open market. All they hold are cash accounts. By controlling interest rates and the amount of deposits needed from other banks, the Central Bank essentially conducts monetary policy (money supply and interest rates)

This system works because, presumably, private banks want to maximize their profits by issuing new loans with their remaining funds/assets (after depositing the required cash amount in the CB)

In times of crisis, banks have too many loans outstanding (a loan to private entities is considered an asset by the bank) and have to limit the amount of new loans/credit they can issue to manage internal risk. Coupled with very low interest rates, banks may lose the incentive to issue loans/credit. This is bad for an economy because nearly all trade and economic activity requires some form of credit – essentially economic activity is reduced simply because private actors have no access to money/credit.

In recent decades, QE is a new policy tool to quickly FORCE (essentially) more money into the market. By buying up assets from banks, the banks now have a lot of cash (which earn very low interest from the CB) and fewer higher-interest assets but correspondingly lower risk of default (all loans have a default risk whereas money is considered risk-free) This gives incentive to the bank to make more loans to the general public.

Put simply QE is when the federal reserve buys assets(usually bonds) from the market with money that it prints to stimulate the economy with increased cash.

Imagine you are a person who has a lot of stuff, clothes, tools, furniture, and so on. You have things, but you need money to spend. This stuff can be thought of as the assets the market has in the economy. It has value, but it can’t be spent like money. So I come along and buy your stuff so that you have the money that you need to spend and be productive. This is like the Federal Reserve Bank buying bonds and other assets so the economy can get back to spending and producing.

Gunning the money supply. Buying someone else’s debt so that cash goes out to banks, and IOUs come in to the Central Bank.

Short and easy: Free money from the money printer.

Slightly longer: The FED forces the big banks to take loans. The big banks loans out that money like banks do. The loan from the FED has a small rate. The load they give out to others has a larger rate. They “pay back the loan with interest”… but it’s a net gain. There’s more money in the system which helps with… liquidity? inflation? confidence? whatever. The real job it’s doing is giving select organizations free money.

They changed the rules in this last round of crisis. Instead of QE going to big banks, now they can give money to literally anyone for anything. [$700 billion in 2020.](https://www.americanactionforum.org/insight/timeline-the-federal-reserve-responds-to-the-threat-of-coronavirus/) (That’s $2,132 for everyone in the USA, but you’d have to pay it back… with an “effective rate of zero”, so really, whenever you feel like it.)

Typically in an economic crisis the value of everything plumets as everyone sells whatever they’ve got to get some cash to make ends meet. Then businesses can’t make as much money because the value has dropped. 1929 and the great depression showed us that’s a horrible self-destructive path to go down. Now that we know better, we print our way out of trouble. With more money in the system, you money is now worth less. If the value of an egg drops, but the value of the dollar also drops the same amount, prices are stable and it’s like there’s no crisis. At least for those that still have a job. But now those affected aren’t dragging the rest of us with you.

I’m being harsh on the FED here, but to be fair this is their job. Keeping inflation in check. Normally they just cut back their interest rate, but it’s already zero, so QA is their “big guns” and running those money printers full tilt. My main complaint is that they’re picking and choosing who to save. They really do have a lot of programs and you can tell they’re trying to be diverse and somewhat fair. But this is a centrally controlled economy. There’s just no way to fairly coordinate something this big. So what we get is arbitrary.